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Week 5 Lecture Eco & Bus

Uploaded by

timothy
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Economics & Business 1

Pramela Nair – [email protected]


Doctoral candidate (Info. Sys. & Tech.)
MBA (Finance) & B. E. (Computer Science)
Chapter 2 Markets
Other Method
Assignment
• Class Discussion
Learning Goals
• What is competition? (G1)
• What do you understand by intensity of competition? (G1)
• How can the competitive strength and position of a business be
measured? (G2)
• How important is it to know the structure of the market? (G2)
• What are the competition-determining variables?
1. (Explain number of suppliers, type of product, cost
structure of products - G3)
2. (Explain Entry barriers – G4)
3. (Explain Demand features – G5)
4. Types of competition – Perfect competition &
Monopolistic competition(G6), Oligopoly (G7), and
Monopoly (G8)
Read chapter 3, section 3.1 & 3.2 to prepare for all the learning goals
above.
Intensity of competition
• Internal competition: When businesses in the same
industry are in competition with each other to satisfy the
same customer needs.

• External competition: When businesses are in


competition with suppliers and customers.

• Potential competition: Threat of other businesses


entering into the industry

16
Competitive position
• A way to get some return on their invested capital.

• The higher the competition within an industry, the lower the


average profitability within that industry.

• Returns can be affected by the following factors:


- effectiveness of management
- quality of the machinery
- staff expertise
- size of the market share
- geographical location of the company and the location
of its markets
- technical ability; etc.
17
Competitive position
• The competitive strength of a business is measured on
the basis of the profitability in comparison to other
industry members. It should be able in the long run to
satisfy all stakeholders.

• Like businesses, industries are also in competition


with each other. The competitive position of an
industry is measured by the following factors:
- average profits
- its contribution to export
- how many people it offers employment to
- its contribution to the domestic product

18
Test 3.1
• A bank receives two loan applications.
• One is by a firm with a return of 5%, while the industry
average is 7%.
• The other application is from a firm with a return of 4%,
while the industry average is 2%.
• Which application represents the better proposition for
the bank’s credit department?

19
Structure, conduct and
performance in a market

• Two sides of markets: demand side and supply side.

• If the industry is made up of large number of companies,


these companies will not be able to exert an influence on
the prices but will have to accept the prices that
originates on the market itself through the interaction
between supply and demand.

• The number of companies is a structural feature that has


an influence on the entrepreneur’s conduct.

20
Structure, conduct and
performance in a market

Structural features Demand features


Supply features •Increase in demand
Number of suppliers: •Concentration of customers
•Supplier concentration •Proportion of consumption goods in output
•Scale of the suppliers •Foreign demand export share
Type of product
•Homogeneous or heterogeneous Conduct
Cost structure of production •Profit maximisation
•Capital intensity •Innovative conduct
•Nature of economies of scale •Entry and exit
Entry barriers
•High fixed costs Performance
•Product heterogeneity •Profitability
•Limit pricing •Increase in added value
•Patents •Increase in domestic sales
•Forward and backward integration •Increase in foreign sales
•Strategic overcapacity •Innovative performance
•Employment
•Productivity

21
Competition
determining variables
The number of suppliers:

•Market strength

•Concentration ratio : A C of 60% means


4

that the four largest suppliers have a


combined share of the market of 60%.

22
Competition
determining variables
The nature of products:

Homogeneous Differentiated
Product features and production processes
Mass-production Tailor-made assembly
Intensive use of raw materials Intensive use of know-how and R & D
(low-tech) (high-tech)
Process innovation Product innovation
Start of production chain End of production chain
(basic goods) (end products)
Features of the competitive process
Price competition Quality competition
Little advertising A lot of advertising

23
Competition
determining variables
Cost structure of production:

•The relationship between fixed and variable


costs

•Differences in cost patterns between large


and small companies within the industry.

24
Competition
determining variables
Entry barriers

•High fixed cost


•Exiting from market
•Production heterogeneity
•Brand awareness will be required for customer loyalty
•Share of the market being retained by reducing prices,
by existing competitors
•Checking R & D
•Forward and backward integration
•Strategic overcapacity

25
Test 3.3
If you were to start a business, would you
rather be active in a saturated market or in a
growing market?

26
Competition
determining variables
Demand features:

•Increase in demand – seller’s market, high


growth and saturation.
•Concentration of customers and suppliers –
market strength
•Foreign export

27
Classification of markets according to number of
suppliers and the extent of product differentiation

Perfect competition: Many suppliers who produce homogeneous


products. Typical markets are milk, sugar, grain etc.

Structure Behavior Result


Many Suppliers Adapt quantity Price equal to minimal costs
Homogeneous product Concentration
Full information
No entry barriers No price, product, No profit in the long term
advertising competition
Low fixed costs No individual innovation

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Classification of markets according to number of
suppliers and the extent of product differentiation

Monopolistic competition: Many


suppliers offering slightly different products.
Typical example: Furniture retail trade.
Structure Behavior Result
Many Suppliers Price-setter Many options for
entrepreneur’s premium
Heterogeneous product Concentration
Incomplete information
Minor entry barriers Competition through price, No industry profit in the long
product, advertising term
Many customers

29
Classification of markets according to number of
suppliers and the extent of product differentiation

Oligopoly: Example - Cars and consumer


electronics

Structure Behavior Result


Few Suppliers Reaction to competitors Price rigidity
Heterogeneous/
homogeneous product
Incomplete information
Entry barriers Competition through product, Profit, but not maximized
advertising
Few/many customers Cartel agreements

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Classification of markets according to number of
suppliers and the extent of product differentiation

Monopoly: One supplier offers a particular product.

•Legal monopoly - Government has left the production of


certain types of goods and services to a company.

•Technical monopoly – The concerned company has the


availability of production factors which no other company
has.

•Natural monopoly – Impossible for other companies to


enter the market because one large company supplies
the entire market and has endless economy of scale
during production.
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Classification of markets according to number of
suppliers and the extent of product differentiation

Monopoly:

Structure Behavior Result


One Supplier Profit maximisation Short and long-term profits
Homogeneous product Price limits
Complete information
No entry barriers
Few/many customers

32
Learning Goals for
next class
• Explain short-run profit maximization. G1
• What are the different forms of concentrations/integrations companies have
possess to deal with other industries? G2
• Explain business performance. G3
• Explain all the phases of a product lifecycle. G4
• What is the importance of Porter’s diamond. G5
• Explain the elements ‘Domestic Demand’ and ‘Economic order’ in Porter’s
diamond. G6
• Explain the element ‘Network of industries’ in Porter’s diamond. G7
• Explain the elements ‘Chance factors’ and ‘Government’ in Porter’s diamond. G8

Read chapter 3, section 3.3, 3.4, & 3.5 to prepare for all the learning goals
above.

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